India: CBDT Releases Buyback Tax Rules

The Finance Act 2016 amended the definition of 'distributed
income', with effect from 1 June 2016, to mean
consideration paid by the company on buy back of shares as reduced
by the amount, which was received by the company for the issue of
such shares, determined in the manner as may be prescribed.

In this regard,Central Board of Direct Taxes (CBDT) had put
forth draft rules (on 25 July 2016) prescribing the manner of
determining the amount received by the company in respect of shares
under various circumstances. The CBDT had asked the general public
and stakeholders to share their comments and suggestions on the
draft. Based on these the CBDT has now finalised the rules for
valuing the amount of receipt in various circumstances vide
notification no. 94/2016 (F. No. 370133/30/2016 – TPL) dated
17 October 2016.

The table below presents all related rules and points out the
modifications/changes made in the final one. We have highlighted
the modifications in bold and italics.

Sr No

Situation

Manner of determining
'amount received'

1

Share issued by a
company on its subscription

Paid up amount actually
received by the company including Share Premium

2

Where a certain
sum is returned before the buy back

Amount received minus
sum so returned

However, if Dividend Distribution Tax (DDT)/any other taxes
relating to such repayment has already been paid on the amount so
returned, then such an amount shall not be reduced

Fair market value of the
stock to the extent it is credited to the share capital and share
premium account

4

In case of any
amalgamation of the company before buyback, shares issued by an
amalgamated company in lieu of shares of the amalgamating
company

Amount received by the
amalgamating company in respect of such shares

5

In case of a demerger,
shares issued by resulting company

Amount received by
demerged company on original shares should be divided in the ratio
of the net book value of the assets transferred in a demerger; to
the net worth of the demerged company immediately before such a
demerger

6

In case of a demerger,
in the hands of demerged company

Amount received shall be
reduced by the amount determined in situation five described
above

7

Shares issued in
consideration for acquisition of an asset or settlement of
liability

Amount
received=A/B

A= Lower of the following amounts

(Fair Market Value of assets as determined by the
Merchant Banker *Consideration being paid by issue of shares)/Total
Consideration

Consideration paid in form of shares to the extent credited to
share capital and share premium account

B = Number of shares issued as part of consideration

8

Shares issued on
succession or conversion of a firm or proprietary concern by
company

Amount received =
A-B
C
A=Book value of assets in balance Sheet – (TDS/TCS/Advance
tax – Refund ) – Amount shown as asset, which does not
represent the value of any asset including unamortised amount of
deferred expenditures

For determining book value of assets, any change in value of assets
consequent to their revaluation must be ignored.

Shares held in
dematerialised form and which cannot be distinctly identified

The amount received for
the issue of shares on the basis of the first-in-first-out
method.

12

In any other cases

Face value of the
shares

SKP's comments

The changes incorporated in the Final Rules attempts to cover
almost all open ended aspects highlighted in the Draft Rules.
This approach of the CBDT is highly appreciated and helps reduce
doubts and ambiguities in the law to a certain extent.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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Let us do an exercise. You may not have bothered so far, so you could do it today. Have a look at the backside of your Drycleaner's slip for the garments you have given him for laundry or dry cleaning.

The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.

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